3.7

Question 1

Cashflow Forecast

Answer 1

A visual aid that shows the expected cash a business expects to receive and pay out in a period of time

Question 2

What is included in a cashflow forecast?

Answer 2

A) Opening balance

B) Cash inflows

C )Cash outflows

D) Net monthly cash flow (B – C)

E) Closing balance (A + D)

Question 3

Net monthly cash flow

Answer 3

Cash Inflows - Cash Outflows

Question 4

Closing Balance

Answer 4

Opening Balance + Net monthly cash flow

Question 5

Improving cash inflows

Answer 5

• Increase cash sales
• Improve credit terms - e.g. reduce trade credit to customers from 60 to 30 days)
  
  • This will mean they collect revenue quicker
• Any of the sources of finance we studied
  
  • E.g. Debt Factoring
  • E.g. Bank Loan
    
    • Initial large positive inflow (Cash Inflow)
    • A series of negative outflows (Cash Outflow)

Question 6

Reducing Cash Outflows

Answer 6

Delay payments to creditors - e.g. ask to increase trade credit to suppliers from 30 to 60 days

Delay spending on capital equipment

Rent/Lease rather than buy

Cut unnecessary overheads

Don’t pay staff ☹

TJ Advice:

• Be careful suggesting “Reduce Marketing expenditure” to improve cash flow
  
  • This may also cause sales to decrease

Question 7

Cash Flow Vs Profit

Answer 7

Why is cash flow different to profit?

• Because of different timing of cash in and out
• A profitable business can have negative net cashflow

Question 8

Working Capital

Answer 8

Question 9

The relationship between investment, profit and cash flow

AO2

Answer 9

Business investment

• Spending on projects, new factory, R & D, market development, acquisitions

Profit

• Investments should lead to higher future profit

Cash

• Large outflow at the beginning
• Followed by regular small cash inflows
• Business should use a Cashflow Forecast to make sure they have enough cash to cover their costs

Question 10

Causes of Cash Flow problems

Answer 10

Expanding too quickly

Allowing too much credit

Poor credit control

Lack of planning